Employees Versus Contractors

Many employers fail to identify the difference between Employees versus Contractors administratively and when they are doing accounting or tax prep.  What is the proper way to classify a worker? Knowing the difference can help save you hassles and delays but also the best way to create an efficient working relationship. Before an employer pays a worker, they must first identify the relationship that exists between the worker and the employer.

Before you hire, you can determine the Behavioral Control, Financial Control, and Relationship of the Parties test. Here are the testing factors:

Behavioral Control

A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised. Behavioral control categories are:

Type of Instructions Given

Type of instructions given, such as when and where to work, what tools to use or where to purchase supplies and services. Receiving the types of instructions in these examples may indicate a worker is an employee.

Degree of Instructions Given

Degree of instruction, more detailed instructions may indicate that the worker is an employee.  Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.

Evaluation Systems

Evaluation systems to measure the details of how the work is done points to an employee. They measure just the end result point to either an independent contractor or an employee.

Training a worker on how to do the job — or periodic or on-going training about procedures and methods — is strong evidence that the worker is an employee. Independent contractors ordinarily use their own methods.

Financial Control

Does the business have a right to direct or control the financial and business aspects of the worker’s job? Consider:

Significant investment

Significant investment in the equipment the worker uses in working for someone else.


Independent contractors are more likely to incur unreimbursed expenses than employees.

Profit or Loss

Opportunity for profit or loss is often an indicator of an independent contractor.

Services Available

Services available to the market. Independent contractors are generally free to seek out business opportunities.

Method of Payment

An employee is generally guaranteed a regular wage amount for an hourly, weekly, or another period of time even when supplemented by a commission. However, independent contractors are most often paid for the job by a flat fee.


The type of relationship depends upon how the worker and business perceive their interaction with one another. This includes:

Written Contracts

Written contracts describe the relationship the parties intend to create. Although a contract stating the worker is an employee or an independent contractor is not sufficient to determine the worker’s status.


Businesses providing employee-type benefits, such as insurance, a pension plan, vacation pay or sick pay have employees. Businesses generally do not grant these benefits to independent contractors.


The permanency of the relationship is important. An expectation that the relationship will continue indefinitely, rather than for a specific project or period, is generally seen as evidence that the intent was to create an employer-employee relationship.


Services provided are a key activity of the business. The extent to which services performed by the worker are seen as a key aspect of the regular business of the company.

Independent contractors are people that provide services that following an independent trade. These service providers offer their services to the public and are not managed by the employer.  An individual is usually an independent contractor if: A) the employer cannot control or direct the result of the work and B) the employer cannot control the means and method of accomplishing the scope of work.

An employee is a person who is managed, directed, and whose performance is measured by the employer. The employee’s financial control is managed by the employer including how many hours they work per week and how much they will get paid.

Still a little fuzzy?

This type of worker classification can be hard to distinguish for business tax preparation or even legal purposes. 365 BOOKSPRO will help guide you to classify work for tax prep! Contact us today and we will get you started!